tv Bloomberg Real Yield Bloomberg December 8, 2018 2:30pm-3:00pm EST
jonathan: from new york city for our viewers worldwide, i am jonathan ferro. "bloomberg: real yield," starts right now. ♪ jonathan: coming up, payrolls coming in below forecasts and wages missing estimates. investors pricing out fed rate hikes in 2019. inflation expectations rolling over, and market volatility leaving global bond funds facing the first full year of outflows in a decade. the big issue, the jobs report adding fuel to the rates debate. >> the wage number was perfectly solid. >> healthy report. >> this is a solid report. >> the fed wants to bring about a soft landing. this is a soft landing report.
>> if the fed wants to soften its message in december, it sounds like it does, it can use this report to do that. >> it's worth seeing that things are different, and it is worth taking a look at that. >> i would not phrase it as a positive so much as stretching out the rate hikes. >> the fed may well move the dots down. >> what i am looking at, what i think they are signaling is that they will do something later this month, maybe, but that will be all for quite some time. i would add to that that my boss, president trump, that is very much in line with his thinking. jonathan: i will be finding out if whether that is a good thing. let's get into this.
the equity market is down and down hard, and the yield curve on treasuries is bull steepening. why? >> investors take their money out of risky assets -- equities, credit -- and put it into fixed income. the area where they prefer to put their money into a short duration assets. that is what leads this bull steepening. greg: i totally agree. fixed income is doing exactly what it's supposed to do. investors are taking down risk and treasuries is where you park your money. colin: but just fixed income products in general, although the credit products and fixed income have underperformed, they have out performed the equity indices. jonathan: as a consequence of that, what have we done? we have taken out credit rate hikes with the exception of maybe one, inflation
expectations have been stripped back as well and we have rolled over. does that make sense to you? is there data that confirms the need to do that, to reprice the rates market that much and inflation expectations to that extent as well? subadra: this is not a fundamental story. if you look at the jobs data today, it was pretty good. data leading up to today has been strong. it is more a crisis of confidence. it is what is happening with the equity markets and it is not clear that the market is convinced that there is a clear strategy for the u.s. government to negotiate with china, and if this comes on, it could have a meaningful impact on global growth. jonathan: to see that volume go into the front in the front end was stunning for me and stunning for a lot of people. there was a conclusion that so many people i've spoken to that basically said the move lower on the front end in terms of yields is limited. the reason being is essentially we have already priced out the fed. what are we doing down here when
we already have such a dovish expectation for the fed? >> the dovish expectations with respect to the federal reserve, i think they are right. the bottom line is, in that part of the curve, there is a lot of expectation. with the yield curve this flat, you pick your spots. flight to quality is clearly in play. i think this is as much of you from investors that maybe the fed has gone too fast and too far with these eight rate hikes. greg: i think it is too much. the market has priced too much into the market now. they are pushing the fed back to the wall. the fact that you have december and then after december, one priced in and cuts in the 2020, basically the room for error is zero. the market has moved too much
and the risk reward is not to bet against the fed. subadra: i agree with greg, the market has moved too much. the question is, when you fade that? jonathan: would you trade it now? subadra: no. i think i would wait to see if there was meaningful change in the dots. the key indicator i look at his inflation expectations. inflation expectations have declined from 210, 220 this year to 290. it has not declined to much below that. inflation is still holding up so we have to see what comes out of the trade negotiation and be patient over the near-term before you change your strategy. jonathan: but in the meantime, there is so much care out there, to reprice inflation expectations. a lot of that is driven by energy, but to reprice the fed as well, i'm struggling to get my head around it. are you? colin: not as much. we are not that far removed from time when the fed said they would be happy to let inflation go higher than are expected
neutral rate for an extended period of time. i firmly believe, which i just mentioned, this amount of rate hikes and this trajectory is part of the reason where we are today. you have had me on before, and i did not expect four hikes this year. let's be frank about that. but i think the projection going into next year is much more challenged and i am certainly on the side without how low the market is and the number of rates to take place, i think it is less. jonathan: there was a big short sitting on the long end of the treasury curve. evidence this week that we have seen a big capitulation off of that. do you agree with that and how clean is the positioning?
greg: it is less offsides today than it was. we have been leaning against that all year. it has been somewhat painful. we have been in the lower yield camp, and there has been a lot of shorts on the other side of that. that is more washed out than it was. i still think the investor by us is short rates. everyone talks about rates meaning to be higher. i think that bias will continue and we will continue to lean against that that bias. subadra: i think there is still more to go on the pain trade. the market is still quite sure. the curve is quite steep, and we saw a decent amount of flattening of that part of the curve, but the very long end futures contract, there is a decent amount of shorts that could capitulate. jonathan: let's talk about this inversion. this very subtle inversion on a specific part of the curve that is getting attention. is that attention overdone? subadra: no, i think it is warranted. if you look at where the curve is now to where we were in
mid-2006 just before the last rate hike was delivered in that cycle, we are exactly at that same spot. by 2007, the fed was cutting rates and we went into recession in 2008. we should be paying close attention to the signals we are getting from the curve. colin: that is the point. because once one of the curve start to invert, overtime, they all tend to invert. it doesn't matter, they are all going to get there. so i think your point is excellent because you need to respect the fact that we have had an inversion already and try to figure out the timing of the rest. jonathan: a lot of people are going to be waiting for 2-10s to invert, but there is a subtle difference. central banks have completely eroded the term premium the last 10 years. the prospect of getting an inversion earlier than you otherwise would.
does that make sense? greg: it does, but does it matter? there is all of this talk about that, but the fact is when the curve is inverting, it is telling you that you do not have to go out the risk curve to take risks. you can go short. thinking about how it works in flows through lending. that equation being upside down matters, but how you get there, i think, does not matter. i think the fact that it is inverted is what investors should focus on. jonathan: it is not the signal, it is the consequence? greg: correct. jonathan: great to have you. coming up on the program, the auction block. a drought appears in u.s. high-yield. that conversation is next. this is bloomberg "real yield." ♪
jonathan: i am jonathan ferro. this is bloomberg "real yield." i want to head to the auction block where we start with u.s. investment grade primary issuance. it is on pace to finish 2018 about 10% to 12% behind last year. $1.25 trillion. bloomberg intelligence also sees a modest decline. returning to the energy sector, the worst since 2016 as the oil market plunged. and finally, the deep discounts with jpmorgan slashing the price of $210 million loan. $.93 on the dollar from around $100. europe, three loans were scrapped over the last two weeks
under brexit fears. still with me are my guests. sentiment is clearly getting knocked around. what is behind it? my colleague wrote earlier this week that if the market needed a phd, it would be psychology. subadra: it is all summarized in uncertainty. uncertainty around trade, tariffs, and all of these issues spilling over to the broader economy. this comes at a time when we are already expecting u.s. growth to slow down in 2019. global growth is not going to be nearly as supportive next year as it has been this year. in the big scheme of things, it is the sentiment and the uncertainty that is ultimately driving market sentiment. greg: yes, i think that is right. investors do not know what the future looks like and the fed is still being proactive when the economy is slowing and inflation is rolling over. that coupled with what is happening on the trade front is
uncertainty squared. jonathan: earlier this week, seeing the headline drop from huawei and to check to see if anything was happening, nothing was happening in the foreign exchange. what was fascinating to me is an hour later, the u.s. equity market, futures started trading aggressively and everyone started to wake up. i notice this over the last couple of months. there seems to be a story where u.s. equities are driving u.s. credit. equity is driving credit -- that is not what people are used to. why? colin: i think that is the stress and uncertainty in the market. the fact that even earlier today, as the u.s. equity market dropped, it was less volatility in the fixed income space and credit. maybe that is waning a little bit. i also think it is still tied into where we are in this cycle and with the fed meeting coming up in 12 days, it is a critical period. there is as much volatility as there could be even uncertainty, and that is where we are. jonathan: is that opening up on opportunity in credit for you?
greg: yes, absolutely. it has moved throughout the course of the year. we have been pretty cautious and bearish on credit, but there is some interesting opportunities. the front end of investment grade corporate market looks attractive. loans is an area we disliked intensely but has traded off sizably. high-yield continues to be ok in our view. i do think it is an opportunity, tactically. not as a long-term investment piece. jonathan: if are going to have such dovish expectations of the fed, and we are going to expect the federal reserve to slow down, what is the attraction in floating rate if that is the story of the fed? greg: it is not about the
floating rate piece for me. professional bond investors monetize the spread. whether it floats are not is irrelevant. i think that misses the central point. the point is that the risk reward has changed in loans that are callable above par, now that they are trading at a deep discount. before, if you were on the credit, it would be called away. if you are wrong on the credit, you basically own it. the change in that price matters a lot for loans. colin: i like high-yield more than loans. with respect to credit, not all in at this point. i agree that there is tactical that needs to go on and you always need to make sure you are defining the credits you are looking at. but i think the opportunity has increased dramatically in fixed income given the performance this year. if i was just looking at 2019. not just generalizing, but i would feel very good about credit product and feel very good about high-yield. high-yield is well above 7% and with my view of the fed being more contained, that is a really attractive place to be. jonathan: it is always interesting to me why the court
of public opinion is so more forgiving to be bearish and be wrong than to be bullish and wrong. for some reason, you can come on programs like this and be super bearish about the following year and it will be forgiven. but if you are bullish, no one will forgive you. what are we expecting in 2019? high single-digit corporate earnings. unemployment lower than it is now in 12 months. shouldn't that be good for credit? greg: it is very good for credit and inflation staying stuck at 2% or a lesser level. again, where we are going to go in the next couple months or so, the projections that we are not too far removed from, roughly a month. many expectations were five rate hikes, at that point i didn't think we had any chance for that, but i would present right now, even with the examples you just laid out, at most, we have two hikes left.
it also depends on the timing and when they will do them. possibly there could be a next one, maybe, but i do not think so. at most, i am looking at two. it makes credit really attractive. greg: what i do not like about the investment thing going forward is that it is so tied to a single factor, so tied to what the fed does and that does not feel great from a risk reward perspective. we have no idea what this institution is going to do yet, we are hanging fortunes on it. that is not a great way to invest. as a consequence, it will be a cost in increase in the risk premium broadly. jonathan: you guys are going to stick with me. i want to get a check on where the market has been this week. treasuries, 2's, 10's, and 30's. the yield shaping up as follows, down five basis points on a two year and a they move on tens and 30's. still ahead, the final spread. big week ahead featuring the scheduled parliament vote on
♪ jonathan: i am jonathan ferro. this is bloomberg "real yield." time for the final spread it coming up over the next week, big events in europe. in the uk, gdp day and a scheduled vote on the brexit. plus, an ecb rate decision with president mario draghi. and a news conference that is going to be absolutely fascinating. some data from the u.s., cpi on wednesday and retail sales coming up later in the week. chinese economic data rounding out the week. still with me, my guests. the ecb is in a tough spot next week. how do they justify ending qe?
subadra: i think they have set the course for ending qe, so i think there will be announcement that they will end qe, but they are going to give themselves a lot of flexibility on how the program ends and they are not going to give us any details on changes to the capital key. i think they will announce but they will keep it very flexible and see how that data evolves. jonathan: they added a dovish twist, rate guidance. essentially telling the market no rate hike into the back end of next year. he needs a dovish twist again, doesn't he? struggling to think of what it is. what do you think? colin: they do need the dovish twist, and what they do need to add to it is extend the timeline of this pause, or what we are going to figure out what to do it looks like.
and not define it, maybe. we are into not defining what the timeline is into us making this move and the easing, and that leaves it wide open that they could change course. jonathan: i have no idea what is going to happen next year. i do want to understand where expectations are because it helps me have an understanding of where these will be priced relative to where people expect things to be. does anybody think the ecb hikes interest rates next year? greg: no, it is not in the price. the market believes they are trapped. you will not see a change in the depot rate anytime soon. but there is a change in leadership next year. the uncertainty around the steady institution of the ecb is also changing. it is unclear how draghi is going to set that up for his successor.
but i think that is an uncertainty that is new. markets do not like new uncertainty. jonathan: is it fair that the federal reserve pauses, the ecb does nothing? subadra: i think so. we have discussed this in the past. even if the fed were to go two or three times, the fear was that if the ecb was thinking they're going to be able to hike rates in the second half of 2019, it would be a difficult proposition given the fact that the u.s. economy is slowing. now there is a real chance that the fed might actually pause after the december meeting and that complicates policy for the ecb. jonathan: german ten-year, 25 basis points, is there a real chance of the german 10-year yield being lower this time next year than it is right now? colin: definitely a chance. greg: yes. subadra: i hope not. [laughter] subadra: to me, 25 basis points is extraordinarily rich given fundamentals in europe. yes, i would like to believe that things improve over time
given the fact that they are ending qe. purchases should push yields higher. to me, bund yields are extraordinarily rich. colin: they will be lower. jonathan: wow. greg: it is more important i think where italy, portugal, and spain are next year. that is the crux of what the ecb was solving for the entire time. i think that is a more important factor. jonathan: a good point. we are going to wrap it up with the rapid fire around. quick questions, short answers. slight inversion on a specific part of the yield curve, a lot of people say it is different. is it different? greg: no. subadra: no. colin: no. jonathan: pricing out inflation, quite a lot in the u.s. tips are now a buy? greg: no. subadra: yes. colin: no. jonathan: a december rate hike, i can't believe it is seriously in play, we have priced out rate
hikes through 2019 and now it is a real debate of whether the federal reserve goes december or not. rate hike, yes or no? greg: yes. subadra: yes. colin: they are going to do it and it is a mistake. jonathan: thank you. great to catch up with you and a special thanks. that does it for us from new york city, we will see you next friday at 1:00 p.m. new york time, 6:00 p.m. in london. for our audience worldwide, this was bloomberg "real yield." this is bloomberg tv. ♪